According to numbers from the Canadian Bank Association, 4.8 million people currently have a mortgage. It’s not a completely surprising number. After all, mortgages have been around for a long time — think nearly 120 years. Even before mortgages existed, buyers would receive loans from sellers rather than banks. Similarly to loan companies, though, if you didn’t make your payments, you’d forfeit your right to live on the land.
Owning homes and property started to change in the 1900s. Historical events like The Great Depression and WWI and WWII triggered a severe economic downturn that led to many Canadians unable to repay their loans. Thus, came the creation of the Canadian Mortgage and Housing Corporation (CMHC) in 1946. Since then, mortgages have many rules and regulations that control who can obtain mortgages.
Who is the Canadian Mortgage and Housing Corporation (CMHC)?
The Central Mortgage and Housing Corporation, now known as the Canada Mortgage and Housing Corporation’s primary responsibility was to administer Canada’s National Housing Act (NHA). NHA’s directive was to improve housing and living conditions across the country. Through CMHC and the NHA, they’ve successfully built half of our available housing.
Not only is CMHC responsible for living conditions, but they are also responsible for helping Canadians afford homes by providing loans and insuring mortgages borrowed from private lenders. For this reason, CMHC introduced long-term mortgage loans that would balance repaying both interest and principal every month.
Aside from residential housing, CMHC is also responsible for providing low-income housing for Canadians with disabilities or seniors on a fixed income. To do this, they oversee programs created for not for profits that can help with these initiatives. Each quarter, CMHC will publish housing statistics with research about the current market.
Why do mortgages exist?
Just like the historical events that brought CMHC to life, most of the additional regulations surrounding mortgage-lending exist due to economic circumstances that have considerably changed how we borrow and what limitations we have in place. For example, the recession followed by a stock market crash in the 1980s led to homeownership savings plans like the Home Buyers’ Plan.
When Canadians struggle to break into the market due to increases in interest rates or mass unemployment, CMHC does its best to continue to provide options for those interested in homeownership. Robert McLister, the founder of RateSpy.com, says that mortgages were devised to make real estate purchases affordable and give creditors security on loans to land and home buyers.
Who do mortgages protect?
Mortgages exist to create opportunities for buyers and sellers, but who do they protect? McLister says they mainly protect the lender by giving the lender a security interest in the borrower’s home.
“If the borrower doesn’t meet the repayment terms, a mortgage lets the lender seize and liquidate the property to get its money back,” says McLister.
What about homeowners? Are they also protected? If a homeowner loses their job or can no longer work due to disability, it’s suddenly a mass fear that they may have to give up your mortgage and sell your property. For this reason, mortgage insurance was brought forth to manage the risk for the lender and to help support the borrower.
What types of mortgage insurance exist?
In Canada, there are four types of mortgage insurance. One of these mortgage insurances protects the lender, whereas the remaining three protect the borrower.
Mortgage default insurance
The first type of insurance is mortgage default insurance, and this insurance strictly exists to protect the lender from a borrower’s inability to make payments. If you put less than a 20% down payment on your home, mortgage default insurance is a requirement. If you use CMHCs mortgage calculator, you can learn more about the standard costs of mortgage default insurance to see how much more you’d pay each month, including interest.
Mortgage life insurance
The second type of mortgage insurance is mortgage life insurance, which exists to protect the borrower. Mortgage life insurance will cover your remaining mortgage payments if you pass away. This way, your family is protected from losing their home. Canadian mortgage life insurance is optional and is typically offered by lenders during mortgage signing.
Mortgage disability insurance
In case of severe illness or accident that disables you or your partner, preventing you from continuing to earn an income, this insurance will protect the borrower and cover mortgage payments. Some employers provide this insurance as a part of a benefits package, but if not, it’s always good to consider adding this insurance to your list of essentials.
Term life insurance
The final type of insurance that protects borrowers from the inability to repay their mortgage is a type of life insurance. You can choose the amount of coverage, and upon your death, your family will receive the payment to help with bills, such as a mortgage. This type of insurance, however, is not directly related to your mortgage.
Ultimately, every facet of a mortgage comes with some type of historical event that has helped to create a new rule or restriction. Typically, CMHC and the federal government are the decision-makers behind most housing regulations, but each province also has its own way of managing certain aspects of their housing markets. Regardless of the rules, mortgages came to be to provide a fair opportunity for Canadians to achieve homeownership, without having to save the entire purchase price of the home.